Canadian Tax and Estate Planning

The federal government announced proposed new trust reporting rules in the 2018 Federal Budget to improve the collection of beneficial ownership information with respect to trusts. The rules were introduced to effectively counter aggressive tax avoidance as well as tax evasion, money laundering, and other criminal activities relating to trusts. The new trust reporting rules will apply to tax years ending on and after December 31, 2021.

Review of current rules

Currently, the CRA’s administrative position is that a trust needs to file a T3 return if income from the trust property is subject to tax, or in the tax year, the trust:

• Is requested to file;
• Is resident in Canada and has either disposed of, or is deemed to have disposed of, a capital property or has a taxable capital gain (for example, a principal residence, or shares);
• Is a non-resident throughout the year and has disposed of taxable Canadian property;
• Is a deemed resident trust;
• Holds property that is subject to the reversionary trust rule in the Income Tax Act;
• Has provided a benefit of more than $100 to a beneficiary for upkeep, maintenance, or taxes for property maintained for the beneficiary’s use;
• Receives from the trust property any income, gain, or profit that is allocated to one or more beneficiaries, and the trust has:
  • total income from all sources of more than $500
  • income of more than $100 allocated to any single beneficiary
  • made a distribution of capital to one or more beneficiaries
  • allocated any portion of the income to a non-resident beneficiary

New filing requirement and exemptions

For taxation years ending on or after December 31, 2021, Budget 2018 proposes that all Canadian resident trusts and deemed non-resident trusts must file a T3 return and provide the additional information on an annual basis, with some exemptions. Because of this new filing requirement, certain trusts currently not required to file a T3 return will have to file for 2021 and subsequent years.

Budget 2018 specifies that the following types of trusts are not required to provide additional information under the new reporting rules:

• A trust that has been in existence for less than three months;
• A trust that only holds the following assets with a total fair market value that does not exceed $50,000 throughout the year:
  • cash;
  • government debt obligations;
  • a share, debt or right listed on a designated stock exchange;
  • a share of a mutual fund corporation;
  • a unit of a mutual fund trust; or
  • an interest in a related segregated fund;
• A graduated rate estate;
• A qualified disability trust;
• A trust that qualifies as a non-profit organization or a registered charity;
• A trust that falls into any of the following categories:
  • lawyers’ general trust accounts;
  • mutual fund trusts, segregated funds, and master trusts;
  • trusts governed by registered plans;
  • employee life and health trusts.
  • government funded trusts; or
  • cemetery care trusts and trusts governed by eligible funeral arrangements.

Enhanced reporting requirements

If a trust is not included in the above list of exemptions, it will have to provide the following information with respect to its trustees, beneficiaries, settlor, and each person who has the ability (through the terms of the trust or a related agreement) to exert control or override trustee decisions over the allocation of income or capital of the trust (e.g., a protector):

• Name;
• Address;
• Date of birth
• Jurisdiction of residence
• Taxpayer identification number (e.g., SIN, business number, trust account number, or a taxpayer identification number used in a foreign jurisdiction)

The new reporting requirements will require disclosure of all possible beneficiaries, including contingent beneficiaries of a trust. Contingent beneficiaries are persons that could be beneficiaries if a certain event occurs. For example, a taxpayer names his spouse as the beneficiary of his estate and includes a clause in the will that names the taxpayer’s daughter as a beneficiary if the spouse is deceased. In this case, the daughter would have to be reported as a beneficiary even though she might not benefit from anything if the spouse is still living.

A trust will have to file a new schedule with its T3 return to report the additional information regarding its beneficial owners. Even if the trust has no income to report, it will still have to file a T3 return to report the additional information. The new schedule cannot be filed separately from the T3 return.

New penalties

New penalties for a failure to file a T3 return were introduced in Budget 2018. The current penalty is equalled to $25 per day, with a minimum penalty of $100 and a maximum of $2,500. An additional penalty will now be applied if a failure to file the T3 return was made knowingly or due to gross negligence, equal to 5% of the maximum fair market value of property held during the year by the trust, with a minimum penalty of $2,500.

Key takeaways

With the enhanced reporting requirements becoming effective December 31, 2021, trustees may want to act early to ensure a smooth transition and minimize the impact of the new rules. The trust documents should be reviewed in detail to identify all parties affected by the new reporting requirements. Communications with the relevant parties regarding the new reporting rules and the required information should start earlier in the process.

If you have any questions or need further information, please feel free to reach out to our Canadian Tax team.